Deposit Markets, Lending Markets and Bank Screening Incentives

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dc.contributor Svenska handelshögskolan, institutionen för nationalekonomi, nationalekonomi fi
dc.contributor Hanken School of Economics, Department of Economics, Economics fi Mukminov, Rinat 2015-01-28T07:24:54Z 2015-01-28T07:24:54Z 2015-01-28
dc.identifier.isbn 978-952-232-272-2 (printed)
dc.identifier.isbn 978-952-232-273-9 (PDF)
dc.identifier.issn 0424-7256 (printed)
dc.identifier.issn 2242-699X (PDF)
dc.description.abstract In the period from 2007 to 2009 the world experienced the deepest financial crisis since the Great Depression. The world economy was in the most severe recession since the Second World War. The financial crisis was followed by a debt crisis in the euro area, which is still far from being resolved. The world economy is yet to recover from the crisis. The financial crises are recurring phenomena. The financial crisis of 2007-2009 is in many ways similar to the previous crises. It has been argued that banks’ poor screening incentives at the peak of the business cycle are one of the main causes of the recurring crises. Bank screening literature argues that in boom times, when the majority of loan applications are good, the price competition between the banks intensifies, leading to lower returns from screening loan applicants. As a consequence, screening standards decline and many bad loans end up on the bank balance sheets. Defaults of the bad loans lead to a deterioration of the banks’ loan portfolios, which causes credit crunches and bank crises. There is also an emerging finance literature arguing that a lower cost of funds, such as a lower cost of deposits, cheaper credit in the interbank market, a lower discount rate, encourages the banks to take excessive risks. Excessive risk-taking by the banks can also lead to a bank crisis. These two approaches explain excessive bank risk-taking from two different points of view: the former one from the point of view of bank revenues, while the latter approach explains excessive risk-taking from the point of view of bank costs. The aim of this dissertation is to build a bridge between these two approaches. This dissertation contributes to the screening literature by explicitly introducing the cost of funds into a bank screening model. This is novel, as most previous bank screening literature has assumed the deposit market to be fully competitive with zero interest rate, thus ignoring the impact of the deposit interest rate on bank screening incentives. This dissertation also extends the literature, which explores the effects of costs of funds on the bank risk-taking, by explicitly modelling the banks’ investment in screening of potential loan applicants. fi
dc.language.iso en fi
dc.publisher Svenska handelshögskolan fi
dc.publisher Hanken School of Economics fi
dc.relation.ispartofseries Economics and Society – 286 fi
dc.subject banking fi
dc.subject bank screening fi
dc.subject industrial organisation approach to banking fi
dc.subject screening fi
dc.subject deposit market fi
dc.subject cost of funds fi
dc.subject lending market fi
dc.subject bank screening incentives fi
dc.subject adverse selection fi
dc.subject banking duopoly fi
dc.subject banking regulation fi
dc.subject.other Economics fi
dc.title Deposit Markets, Lending Markets and Bank Screening Incentives fi 2015-02-13


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